Navigating a storm that threatens American biotechnology
By David Beier
David Beier is Managing Director of the San Francisco-based life science venture capital firm Bay City Capital. He previously held senior positions at Genentech and Amgen and also served in government as Vice President Al Gore's Chief Domestic Policy Adviser.
August 26, 2022
The passage of the Inflation Reduction Act last week is an important milestone in the history of American biotechnology. I’ve been honored to participate in that history from a variety of perspectives: White House adviser, congressional staff, senior biotech executive, public company board member, lawyer, and venture capital investor.
Those experiences shape the lens through which I view the industry’s evolution and its future. Over the past four decades, our freedom to innovate has been underpinned by – and helped create – a marketplace that was open enough to fully reward risk-taking investors devoting capital to cutting edge science. And so I am disappointed by the new law’s price-setting provisions and market distortions. But I remain optimistic about the ability of modern bioscience to deliver new treatments and cures.
The arc of the industry’s progress bends toward access and availability to new medicines for patients. Going forward, modest changes to these new regulations can ensure that progress continues. In the 1980s, the early days of my career, there was no viable domestic process for enforcing process patents and no international standard for protecting pharmaceutical innovation. Patent life was shortened by a slow, unfocused regulatory review process. No meaningful generic drug industry existed, and inventors faced uncertainty in enforcing patents. Medicare had no drug benefit, meaning seniors and the disabled were often denied access to life-saving therapies.
Over the intervening years, elected officials of both parties – from presidents to members of Congress – have helped nurture a uniquely important American asset. The result: American leadership in the bioscience sector is unquestioned and unchallenged. What was an infant industry at the start of my career is now one of the largest private sector employers in several states and regions.
There are five main reasons for this success story.
1: Support for Basic Research
The first key to this success has been public policy support for basic science research. That research occurs in the private sector, supported by tax credits; at universities and independent labs, encouraged by public-private partnerships; and at the National Institutes of Health, which have benefited from sharply expanded public funding (though that funding has at times been in jeopardy). Breakthroughs from genetic sequencing and the Human Genome Project, cancer immunotherapy, and mRNA vaccines that saved millions of lives during COVID all flowed from those commitments.
2: Patent Protection
Over a period of about ten years Congress enacted laws to strengthen patent protection here and abroad, make enforcement more certain, and restore patent time lost to regulatory review. Crucially, the Hatch-Waxman Act in 1984 affirmed the importance of patent protection by extending that period to up to 14 years once a drug hit the market and helping to create the generics sector we have today (and lay a foundation for the much newer concept of biosimilars). Patent protection outside the United States is stronger as well, meaning unauthorized copying — or freeriding by our economic competitors — is largely barred. This rewards innovators who operate at a global level and protects American inventions.
3: Generics, Biosimilars and Insurance Reform
The US has created a legal framework that allows for the introduction of competing products, such as generic drugs and biosimilars, to enter the market quickly once a drug’s patents expire. This fair competition has saved American consumers hundreds and hundreds of billions of dollars in drug costs.
Insurance reform has also helped change the game. More than 60 million Americans secured access to drugs and biologics after the passage of Medicare expansion in 2003 (a law that also spurred investment in R&D for drugs to treat diseases of aging, like cancer), and tens of millions more through health insurance coverage that arose from the Affordable Care Act in 2010. Special rules have increased access to drugs for people with rare diseases and incentivized their development, and new incentives were created to improve the availability of drugs for pediatric populations, neglected global health needs, and bioterror countermeasures.
4: Improvements at the FDA
Fourth, the US Food and Drug Administration —the global gold standard for approval of new medicines — in recent decades has benefited from greater resources, wiser leadership, and the application of a science-based approach and real-world evidence to ensure rapid access to breakthrough therapies. These improvements started with user fee financing and continued through new FDA reform laws and administrative actions or regulations. All were passed or created with bipartisan support. The FDA is now at the cutting edge in its understanding of the latest scientific developments in CRISPR technology, genomics, AI/ML, gene therapy, vaccines, and drug/device combinations.
5: A (Somewhat) Free Market
It’s no coincidence that a majority of new drugs are invented for the American market and that as a consequence, the United States has the bulk of global life science employees. Until the Inflation Reduction Act, the United States stood alone as a country without the ability to dictate drug prices (despite some government intrusions into a free market, including Medicaid rebates, VA pricing and sales at discounts to safety net hospitals, and opportunists’ clamoring for price controls over the past two decades), relying instead on intermediaries to negotiate prices on behalf of government-sponsored plans.
Make no mistake, aside from incentivizing larger companies to reinvest their profits in R&D, this uniquely somewhat-free market has been essential to allowing small and medium-sized companies funded by venture capital to thrive in the life sciences ecosystem. Smaller companies nurtured at least the early stages of well over half of all new medicines approved by the FDA and are increasingly responsible for the entire development path of new medicines. The scale of life science investment dwarfs anything seen in any sector other than technology.
These five factors, among others, are why global industry leaders find it attractive to locate research and development facilities in the United States and partly explain why an overwhelmingly large majority of life science investing happens inside the United States. Even companies located outside the United States are drawn to study and address the unmet needs of US patients above all others by our somewhat-free market.
A Look at the Inflation Reduction Act
What has this new law changed? What are its flaws and how can they be fixed?
Most importantly, the new law permits the government to set prices that Medicare will pay for a relatively small number of medicines starting in 2024 and continue to grow that number over a period of years. The new law also caps with a prohibitive penalty price increases above the rate of inflation.
One of the drug price features of the IRA is particularly problematic. The government can set new prices nine years after FDA approval for pills (technically all drugs approved under NDA, which includes some injectables) but 13 years after FDA approval for injectable drugs (drugs approved under BLA are mostly injected or infused). This disparity, a result of a misunderstanding of the role of patents vs data exclusivity periods created by Hatch-Waxman and the ACA, invites discrimination against a type of drug delivery system that has unique advantages: pills are easier and less expensive to administer, they’re typically less expensive to manufacture, the active drugs in pills can more readily reach targets in the brain and inside cells, and they’re more easily made to go generic than injectable biologics because they are readily interchangeable at the pharmacy (unlike biosimilars).
More important, that disparity is likely to reduce investment in cancer and Alzheimer’s drugs, which are primarily diseases of aging covered by Medicare. This flaw could be easily fixed by evening out the period of repose before government price setting to 13 years, which is still lower than the average of 14 years drug companies have enjoyed since the passage of Hatch-Waxman nearly 40 years ago. Since the IRA doesn’t set a floor level for how low CMS could set a price during the “negotiation” period, investors already will presume that prices will be set lower than the minimum discount thresholds defined in IRA and used by the CBO to score the bill. Therefore, if fixing the law by changing 9 to 13 requires an offset, that’s possible by increasing the post-13-year minimum discount from 35% to 42%. This would be a budget-neutral change with a profoundly positive impact on restoring the incentives for small molecule R&D for diseases of aging, which would lead to societal savings and long-term benefits for patients, which is to say all of us.
At the end of the day, I remain optimistic. Strong bipartisan majorities want to do everything possible to cure cancer, treat Alzheimer’s and offer vaccines and treatments for diseases like COVID, monkeypox, diabetes, sickle cell or AIDS. Strong bipartisan majorities support research and development and increased spending and infrastructure at NIH and FDA. Most want strong intellectual property protection (here and globally), and many wish to further expand access through health insurance reform and lower patient out-of-pocket costs (the new law pays lip service to what seniors pay out of pocket but doesn’t go nearly far enough). A minor fix to the new law to equalize Medicare price setting for small and large molecules at 13 years after FDA approval can keep us on track towards our shared goals of creating more medicine, ensuring broad access to those medicines, and keeping America the global leader in biotech.
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